NOTE: As provided in LFC policy, this report is intended for use by the standing finance committees of the legislature.  The Legislative Finance Committee does not assume responsibility for the accuracy of the information in this report when used in any other situation.

The LFC is only preparing FIRs on bills referred to the Senate Finance Committee, the Senate Ways and Means Committee, the House Appropriations and Finance Committee and the House Taxation and Revenue Committee. The chief clerks are responsible for preparing and issuing all other bill analyses.

Only the most recent FIR version, excluding attachments, is available on the Intranet. Previously issued FIRs and attachments may be obtained from the LFC office in Room 416 of the State Capitol Building.

(Parenthesis ( ) Indicate Revenue Decreases)

Duplicates Senate Bill 268

SOURCES OF INFORMATION

Taxation and Revenue Department

SUMMARY

Synopsis of Bill

House Bill 342 would reduce income taxes over a three-year period by a phased in change of the income tax rate structure. In the first year, FY2000 (with tax based on income earned in calendar year 1999), the legislation proposes to add a zero tax bracket, and to lower the rates for the first three brackets and the top bracket. The following tables contrast the current rate structure with the proposed structure for single filers (41 percent of all tax filers) and married joint filers (47 percent of all filers). The rates shown in the table are marginal tax rates, meaning the rate at which additional income is taxed. The income brackets are for taxable income. Taxable income is considerably lower than adjusted gross income because of deductions and exemptions allowed.

In FY2001, the second year of the plan, the second tax bracket is widened and the top bracket is dropped, effectively reducing the top rate from 7.9 percent to 7.1 percent.

FY2002 is the last year of the proposed income tax reduction, the number of brackets is reduced to three.

FISCAL IMPLICATIONS

TRD has estimated that the proposed changes would cost the general fund $32.7 million in FY2000, $62.1 million in FY2001, $99.1 million in FY2002 and $107 million in FY2003.

Reductions in state income taxes are partially offset in later years by increased federal income taxes as taxpayers who itemize are allowed to deduct state income taxes. For high income earners, this implies that a $1000 state income tax cut will be offset by a $300 to $400 federal income tax increase. Thus, it cost the state $1000 to save the taxpayer $600 to $700 in tax payments. TRD generally makes this point. For an example, see TRD FIR on House Bill 486.

ADMINISTRATIVE IMPLICATIONS

TRD reports that it can absorb the proposed changes within existing resources.

DISTRIBUTION OF TAX REDUCTIONS

The TRD FIR provides information as to the distributional changes implied by the proposed tax cuts. The overall reductions by income groups are summarized in the following table.

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